Pfizer AstraZeneca deal would boost Treasury coffers

Beyond tax, executives from Pfizer - the world’s largest drugmaker - have emphasised that AstraZeneca’s improving pipeline is the main motivation driving their interest in the business. AstraZeneca’s core areas -including cancer, heart treatments and diabetes care, are among Pfizer’s main priorities.

The Anglo-Swedish company’s pipeline of drugs has improved in the months since it first rebuffed Pfizer’s initial approach in January. A lung cancer medicine in early development won “breakthrough” status from America’s Food and Drug Administration (FDA), meaning it will be fast-tracked through the US regulatory process. Meanwhile, an ovarian cancer drug has also cleared late stage clinical trials and has been placed on the FDA’s priority review list for final approval. Although Pfizer’s own cancer pipeline has also made some progress in the intervening period but compared with AstraZeneca, it is weak. One of the US company’s most promising breast cancer drugs has entered late-stage development.

AstraZeneca has also completed the buy-out of a six-year-old diabetes alliance agreed with Bristol-Myers Squibb, giving it the biggest collection of non-insulin diabetes medications on the market. Pfizer’s cupboard is relatively empty by contrast in this area. It has just one diabetes compound in late-stage development.

Brilinta, AstraZeneca’s new heart drug and a portfolio of respiratory medicines, are also a tantalising prospect for Pfizer to acquire with the deal.

As with any merger, there will be plenty of opportunities for cost-cutting. Pfizer’s bosses were reluctant to put a figure on this but he company has a reputation for aggressive financial controls. The company exceeded its own $4bn cost-cutting target for its acquisition of Wyeth in 2009.

But perhaps the most mouth-watering prospect for Pfizer is that a takeover of AstraZeneca would reduce its tax burden and find a tax-efficient use for its huge overseas cash pile, estimated at around $63bn.

“The reason Pfizer shareholders think this is a good deal is they are using the cash,” said an industry expert. “It’s a very tax-effective inversion mechanism. Thirdly, there would be massive cost savings,” he said. “It’s probably got very little to do with innovation or promoting the UK’s life science industry”. Whatever Pfizer’s main motivation for the deal, analysts predict it will come back with a firm offer within the 28-day window required by UK takeover rules.

It is thought that a bid of around £55 per share - a 35pc premium on AstraZeneca’s Friday close - would be enough to get AstraZeneca’s board talking. AstraZeneca has said that it is “absent a specific and attractive proposal” from Pfizer at this point.

“Clearly Pfizer has displayed that it has an extremely high degree of motivation here,” said Mark Clark, analyst at Deutsche Bank. “My assumption is having gone public Pfizer will be trying to sound out Astra shareholders and trying to check out price sensitivity, to allow them and Astra to get around the table.” He also said Pfizer “might even be prepared to go hostile” if it cannot win over Astra’s board.

Savvas Neophytou, analyst at Panmure Gordon, said an agreement would be reached. “It will come at a price, but ultimately once AstraZeneca gets round the negotiating table, we believe an agreement will be reached to recommend a deal.”

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